I hope this one works, if so you get my upvote!
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Ivo Flipse♦Jun 24 '10 at 11:34

Haven't had a chance to try this yet, but it's very plausible - typical of MS security 'fixes' - "if there's a risk, remove the feature". Sadly, even if it works, it won't work for me, since most of my users won't have the privileges to modify their registry. You'll still get an upvote from me if it works though :)
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ChrisAJun 25 '10 at 17:09

+1 for a good idea, but it didn't work sadly.
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ChrisADec 11 '10 at 15:45

Thanks. However, is this possible with Outlook 2007? Pasting a URL in the Insert Picture dialogue gives a clickable link, not an image.
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ChrisAJun 24 '10 at 9:20

Are you using the latest up to date version of Office 2007? Since it seems a known issue back in 2007...
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Ivo Flipse♦Jun 24 '10 at 9:29

AFAIK, I am. I apply all the service packs and updates. Neither of the above techniques works, BTW. In either case, if I drag a JPG in, or copy/paste it (from IE), it puts the picture in the email Ok, but as an embedded image (with a src="cid:xxx" tag) not as a linked one.
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ChrisAJun 24 '10 at 10:22

I finally found the answer to this and decided to share my newfound knowledge. The process is somewhat obfuscated, but it's not too bad.

The first thing you need to do is make the HTML file you want. Just open notepad and put the html in that you want in the document and save it as .htm.

My apologies, looks like the document must be made using microsoft word or it will not work. In other words, instead of creating an html file from plain text, open Microsoft Word and make a document then save as filetype htm. Then you can edit it to add raw html like pictures.

Finally, go like you're going to compose an email. Click Insert > Attach File. Browse to the file you just made, and select it but do not actually insert it. The Insert button on the bottom right should now be enabled with a small arrow to the right. Click the small arrow, and click "Insert as text".

This will pull all of your raw HTML in. What's better is you can actually add text, change formatting, and tweak it if you like. Be warned that tweaking may result in undesired results, so I recommend sending it to yourself as a test to see if it will show up correctly when it's sent.

That's it, no registry changes required. Anyone should be able to do this relatively easily.

The need for the Registry tweak may depend on the Outlook version. According to this, "the default for Outlook 2013 is already to link to the pictures instead of embedding them so there is no need to set this value." (of the registry key).